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Peak Oil Primer

April 14, 2011 — The International Monetary Fund has released a report on oil, "Oil Scarcity, Growth, and Global Imbalances." Rick Monroe takes a look.

January 16, 2011 — The International Energy Agency has abruptly declared that the peak of conventional oil production was, in fact, in 2006. They are still maintaining the fiction that unconventional oil can make up the difference and likely they will never say that publicly. They seem to be saying what they can in a difficult political situation.

May 6, 2010 — Oxford University Lecturer of Politics Dr. Joerg Friedrichs in a paper published in Energy Policy asks: how is the U.S. likely to react as oil production declines? Will it follow the path of Cuba, North Korea, Imperial Japan or something completely different?

April 26, 2010 — Puru Saxena, Hong Kong Investment Manager and frequent guest on major media says, "We foresee a big energy crisis in the next two, three years. And I think we're pretty much close to peak oil in terms of daily flow rates. This is not because of politics, this is not because of OPEC. This is because of geology. You cannot continue to increase the production of oil."

April 11, 2010 — Report from U.S. Joint Forces Command points out that oil surplus could disappear by 2013 and oil production deficit could reach 10mb/d by 2015. Read more at The Guardian UK.

March 25, 2010 — Glen Sweetnam, director of the International, Economic and Greenhouse Gas division of the Energy Information Agency (EIA) used the following graph in a closed-door meeting:

Our video discusses different items than the primer; you might want to watch that, too.

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It's not like we weren't told that this day would come. The warnings were actually quite common, like when 58 national academies of science warned the world in 1994 that population growth was out of control. Or Lester Brown at the Earth-Policy Institute warning us that aquifers feeding hundreds of millions of people are running dry (PDF slide presentation). Should it be surprising, then, that with 6.8 billion of us, even a good-sized planet like Earth would eventually start to feel cramped and run low on resources?

You probably know what we're doing to the atmosphere to cause global warming, but you may not have been following what's happening to oil. No, it's not running out, but it soon will feel like it. We've reached the half-way point of the easy-to-drill oil. Soon world oil production will decline — and there isn't any amount of technology that we can throw at the problem to stop that from happening.

Like all finite resources, oil production will reach a peak and then decline. Disagreements are primarily about when the peak will be reached, how severe the decline will be and whether we can leave oil before it leaves us. Unfortunately, in each case, the news is not good.

First, by counting the production announced by oil companies and using the existing depletion rate of the world's oil fields, here is how short-term oil production looks:

Second, existing fields are declining at 6.7% (IEA), which means that every two and a half years the world must put into production the equivalent of Saudi Arabia's entire output. So far the oil producers are managing to do that (just barely) but soon they will fall behind.

Last, can we leave oil before it leaves us? That's now impossible. We needed to start at least two decades ago, according to Dr. Hirsch in his landmark 2005 Department of Energy Study (video on CNBC and the report is available here).

As we continue to roll over to the other side of the production curve, prices and availability will be severely impacted:

That's because we're facing a liquid fuels shortage. Take a look at how many vehicles the U.S. alone has and how many years it takes for the fleet to turn over:

(Editor's note: since writing this primer, the fleet turnover period has increased dramatically, suggesting that we have entered the Period of Receding Horizons. See You've Bought Your Last Car.)

As we ride down the right side of the oil production curve, those cars, trucks, busses and airplanes will continue to want ever more expensive oil — but it won't be available:

Take a close look at that graph. It assumes a decline rate of just 4% per year. In five years, the world loses approximately 20% of its oil production.

Alternative Energy Sources

"But what about alternative energy?"

Looking closely, it's not nearly up to the job of reaching 86 million barrels per day of liquid fuel production:

Each alternative has insurmountable obstacles that prevent it from fueling the world's internal combustion engines.

The renewables most people think of — wind, solar, tidal, geothermal — provide electricity or heat. But the world has 800 million vehicles (cars, trucks, bulldozers, etc.) that require liquid fuel so they are no help. Nuclear energy doesn't help either, because it provides electricity, too. If you think that we'll roll out electric cars in time, you probably are assuming we will continue to have a healthy economy — but we won't. New technology can enter the marketplace quickly only when there is sufficient surplus profit. During oil shocks individuals and companies lose their surplus profit and don't replace equipment, including vehicles.

Besides, the few highway-capable electric cars about to enter mass production right now will not sell in sufficient quantities to impact oil use before oil production declines. Deloitte estimates that if the economy continues growing or at least not contracting electric vehicles will make up less than 5% of the market by 2020.

The hydrogen economy was always a non-starter for two reasons. First, it is very inefficient to turn electricity into hydrogen then turn it back into electricity. Once all the conversions are done, one is left with only about 25% of the original energy. Second, hydrogen requires building a completely new infrastructure to support it. If we are going to move away from the existing petroleum infrastructure (refineries, gas stations, etc.), why build a new infrastructure when the electricity grid is already built? We should have pushed hard for electric vehicles, not hydrogen ones, and hydrogen was an unfortunate distraction.

Energy from biomass (biodiesel, ethanol, etc.) can't scale up, even if we were to put every acre of farm land under production. Making this strategy even worse, of course, is the impact on food prices by turning food into fuel.

We could move to cellulosic ethanol once the technology is perfected and advocates of that strategy say that the feedstock can be grown on marginal land, thus reducing pressure on food crops. However just because it can be grown on marginal land doesn't mean that it will be grown exclusively on marginal land. It is fanciful to think that a farmer will not use his best land to grow the feedstock — he will do so even if that means taking food crops out of rotation. If the profit is there, he will use whatever land is available that will provide high yields so as to maximize his returns. That means that any kind of fuel that must be grown will be in competition with our food supply.

However, it is unlikely that cellulosic ethanol will ever reach large production volumes. Corn ethanol was an economic bust because the net energy provided by the fuel was too low. It was primarily the low net energy (especially when compared to petroleum, which has very high net energy) that was the reason many corn ethanol companies have already gone bankrupt.

The problems with ethanol that critics have been pointing to for years have finally reached regulators. In February 2010 the U.S. Environmental Protection Agency lowered the cellulosic ethanol production mandate to just 6.5 million gallons per year, down from 100 million gallons per year, a 93.5% decrease. For comparison, the U.S. alone uses approximately 9 million barrels of gasoline and diesel — or 378 million gallons per day. This technology was overhyped by people who didn't do the math well (just like hydrogen).

As for oil from shale, it's good to remember that oil shale is a rock, technically called marlstone. If we are trying to get oil from rock, that should be a strong indicator that we are getting desperate. Shale has roughly the energy of a baked potato and the net energy available after one extracts the oil from shale is so low that, in my view, almost all the shale will stay in the ground forever. Despite shale being hyped for well over a century, no physical process yet invented can obtain the energy from the shale at a net energy profit. There are some small pockets of oil within the shale that seem to be worth getting, but it doesn't amount to much.

The tar sands are also low net energy sources of oil. Current production is only 1.5 million barrels/day (2008) and because of the enormous quantity of water and natural gas used to clean and cook the sand, it is unlikely to go above 3 million barrels/day, according to the Canadian government. For a thorough examination of the tar sands, see Tar Sands: The Oil Junkie's Last Fix at The Oil Drum. (Just remember that tar sands are a mining operation, not a pumping operation. That's a world of difference because mining operations can't be ramped up quickly and take enormous amounts of capital.)

Converting coal to a liquid, besides being an environmental disaster, is breathtakingly expensive. According to its industry lobbying group, it costs $1 billion to make a plant that produces just 10,000 barrels a day. When the world is currently using 86 million barrels a day and as the economy declines, how many of these plants can realistically be expected to be built? And at what environmental cost?

Newer technologies like algae are astronomically expensive (currently $50 per gallon, 2009) and can't be ramped up in time, either. Algae is also a bust, just like cellulosic ethanol and hydrogen, because of its low net energy. Expect to see many algae companies to go bankrupt soon, too.

There is much more natural gas available if two conditions continue. The first is that we continue to allow unrestricted hydro fracking to obtain the gas. However, the hydro fracking process is unlikely to remain exempt from the Safe Drinking Water Act (exempted by the Bush administration in 2005) for much longer now that New York as has discovered the almost 300 water-polluting chemicals the process relies on. (The industry has refused to disclose the chemicals likely because many of them are highly toxic and carcinogenic.) ProPublica has an excellent series of articles on the unfolding hydro fracking story.

The second condition is that abundant capital must be available to continue to drill these new types of wells. These wells produce much less gas than those that drill for conventional natural gas, often experiencing production exhaustion within six months.

If you examine the alternatives, you'll see that there is no combination of technologies that can be deployed to make up for the energy we get from oil before world oil production rapidly declines.

That's because the world is overwhelmingly dependent on fossil fuels in general, and oil in particular:

As the oil increases in price, to say that the consequence to the U.S. (and world) economy will be severe is no understatement. It won't be a smooth run-up in price: there will be hoarding and shortages, which will cause stutters in our just-in-time manufacturing and delivery systems.

Let's look at just the United States for the moment.

Higher Oil Prices Impact the Economy

The American economy uses roughly 19 million barrels of oil per day (2010). Over a year, that's 7 billion barrels, or about one quarter of the world's total oil usage. Every $10 increase in a barrel of oil thus removes $76 billion from the American economy that could be put toward productive use.

As oil continues to increase in price, this growing drag on the world economy will continue to lower worldwide economic growth (which we think was unsustainable anyway) until it starts shrinking; the U.S economy has already started to shrink because it is in a recession that will soon be recognized as a depression. (This temporary blip up will reverse when the next global oil shock hits, likely before 2014.)

'Systemic Failure' Inevitable

Making things worse, this is happening when total debt in the U.S. alone is about $48 trillion dollars, or just over three times the size of the current U.S. gross domestic product.

A shrinking economy due to permanently declining oil means that the debt on the books will never be repaid. It can't be paid back because oil is really a form of stored work. Less oil means less ability for governments, businesses and individuals to make a profit (or tax surplus) and thus service the debt.

When the world's investors realize that the debt they counted on being repaid will never be repaid because of peak oil, we expect the entire financial system to respond extremely poorly. You can see the main stream media start to acknowledge this problem in various interviews like that with Hong Kong investment manager Puru Saxena.

What about pensions and entitlement programs that depend on a functioning (and ever-growing) economy?

That's a very good question. We believe they will all fail as the assets they hold fall in value and government tax revenues continue their decline.

We believe that we are at the beginning of the next great depression. This time, though, it's a depression that marks the decline of this type of high energy civilization. We are entering what I call the Scarcity Economy and what John Michael Greer, author of The Ecotechnic Future, calls Scarcity Industrialism. Resources increasingly becomes expensive in real terms and labor becomes very inexpensive. It also marks the beginning of a global credit contraction, which will have strongly deflationary impacts.

It's common for people to think that this sort of macro trend can be addressed with new technology (when they are aware the trend exists) and this sort of economy can continue. With a global trend of this magnitude at most new technology can lessen the impact. The world is on the cusp of entering its contraction phase due to the decline of oil. People who think that the current level of economic activity (and population) can be maintained at the current level usually don't realize how much energy we obtain from oil and how many decades it takes to move off of it.

Our Decaying Infrastructure

As James Howard Kunstler has pointed out, we built our world around us assuming that we would always have access to cheap energy to maintain it. Our water systems, sewer systems, highways and electric grids all require energy to be kept in good repair.

What happens when that cheap energy disappears? How will we keep our systems running, especially as capital becomes scarce? In most areas of the country, an enormous amount of energy and money (particularly in the form of bonds) is required to keep the water, sewage and transportation systems maintained.

Popular Mechanics, though unaware of peak oil, has a good overview of the size of the task to remediate the U.S. infrastructure, which is currently in disrepair.

Oil and Population

It won't be just the economy that is affected. Here is a graph of world population and oil production:

The orange curve is human population. It is in what ecologists would call a "population bloom." The population bloom occurred in part because of easily accessible fossil energy, particularly oil. Oil allowed us to send our fishing ships far out to sea; to drill deep water wells to irrigate our crops; and to grow, harvest, refrigerate and distribute vast quantities of food. It enabled us to feed 6.8 billion people. In fact, Dr. Pimentel of Cornell University estimates that every calorie of food we eat uses at least 10 calories of energy from oil.

Here is another look at the relationship between fossil fuels and population:

As oil production declines, will we be able to feed all 6.8 billion of us? It's a valid question to ask, especially as credit becomes scarce.

The Near Term

The world is currently using approximately 85 million barrels per day (mb/d) of all liquid fuels. The International Energy Agency (IEA) has warned the world governments of an oil shock by 2012 for a variety of reasons.

Here is what the Chief Economist of the IEA said in November of 2007:

“By 2015, 37.5 mb/d new production will be needed; only 25 mb/d worth of projects are on the books leaving a gap of 12.5 mb/d that will cause an 'oil crunch' by 2012."

In a later interview, he said:

"Unfortunately, there's a lot of talk, but very little action. I really hope that consuming nations will understand the gravity of the situation and put in place radical and extremely tough policies to curb oil demand growth.”

It's actually much worse than he is saying. Take a look at the projected worldwide new oil production based on the major oil projects on the books:

At first glance, it looks like there is a lot of oil production coming online. The reality is much different:

Almost 5 million barrels per day (mb/d) of production is needed just to make up for the decline of existing fields

Why aren't there more projects in 2013?

Major oil projects take between 5 and 10 years before first production, so they should be showing up now. That number will go up, but it has to go up a lot.

John Hess, the CEO of Hess Oil, said this at the 2008 Cambridge Energy Research Associates oil conference:

"Given the long lead times of at least 5-10 years from discovery to production, an oil crisis is coming and sooner than most people think... it is imperative that we change our mindset, our sense of urgency, or the consequences will be severe."

Debt Makes Everything Harder

All this is happening while the U.S. and the world in the midst of the largest credit bubble ever:

That image comes from the Crash Course and shows that we are in uncharted territory. A massive amount of future profits would already have to be devoted to paying that debt back — but how will that debt be paid back when there isn't the oil to do it?

What's in Store for the U.S.?

What will the U.S. look like in ten years, with oil availability declining, unable to pay back its debt, little money to maintain its infrastructure (the American Society of Civil Engineers gives the infrastructure a "D" on its report card) and wave after wave of newly unemployed?

It will look like a third-world country.

In fact, I believe that the human race is at the peak of energy availability, the peak of the economy, the peak of what the atmosphere can tolerate (i.e. global warming), the peak of population and the peak of resource usage.

You and I have had the opportunity to live in one of the most fantastic periods in human history. It was relatively brief — just a few centuries really — and it produced an economy that allowed us to buy almost any product we wanted from any country in the world. We could fly to the other side of the planet in just a few hours (and then complain that it took 12 whole hours to fly to the other side of the world!).

This globalization was possible because of the immense amount of energy we took from underground and put in our factories, our cars, our planes, our tractors and all the other machines that use oil.

Globalization Unwinds

Now we're moving into a period in which globalization is unwinding. Life will become very local, very soon. In my public talks, I call this hyperlocalization.

You probably will be disoriented and unsure of how to live in this new world. What does this mean for your kids? Will you have work? What will the nature of work be without all that energy to run the machines? You will undoubtedly need to learn new skills; consider signing up for our newsletter to find out when we release new courses. We already have The UnCrash Course, a comprehensive, six-week online course to prepare you for a post peak life, and many other courses that will help you pick a post-peak livelihood or start a permaculture garden.

In The Guide to Post Peak Living, you will get to explore what the future will bring. We think it's an opportunity to reassess how we are living our lives. There were many great aspects to living during the Age of Oil — but the costs were high, too. Many of us became rats in the rat race. The planet in particular paid dearly for our oil binge.

Create Community Where You Are

There are lots of people who want you to be successful in your preparations (including us!). Get to know your neighbors and start thinking in terms of your community, not just you and your family. I call it community-sufficiency. There's nothing wrong with being self-sufficient, but I think you'll quickly find that you truly can't do this alone.

I am greatly indebted to the wonderful contributors and commenters at The Oil Drum and to Richard Heinberg (author of The Party's Over) and all the peak oil educators, from Dr. Hubbert to Dr. Colin Campbell, for opening my eyes to Energy Descent. I'd also like to acknowledge the courage of Dr. Hirsch, Dr. Bezdek and Dr. Wendling in releasing their landmark 2005 paper on peak oil mitigation when it was unfashionable to say that world oil production has a limit.

And, of course, many thanks to the man who had the most courage by releasing his landmark paper on oil depletion in 1956 despite the protests of his employers, M. King Hubbert.

- André Angelantoni, President, Post Peak Living

Updated May 2010Oil Scarcity, Growth, and Global Imbalances

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